CIA.CSOP

Reading: Consolidated Standards of Practice, 1240, 1400, 1510, 1520, 1600, 1700, 2100, 2200, 2300, 2400, 2500, and 2600, January 1, 2023.

Author: Canadian Institute of Actuaries

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BA Quick-Summary: Complete Standards of Practice Materiality is judged from the user’s perspective. A deviation from standards is acceptable if it wouldn’t affect the user’s decisions or expectations. If multiple users or uses exist, the actuary is expected to apply the most rigorous materiality standard relevant to the work. Actuaries may rely on the work of others if it’s justified and reasonable, but they remain responsible for their own conclusions. When others, like auditors, rely on the actuary’s work, the actuary is expected to cooperate and provide clarity on the assumptions and methods used. Assumptions must be appropriate and justified, especially when chosen by someone else. Reports should clearly state the methods, assumptions, and any limitations, with enough detail to allow another actuary to understand and assess the work. Property & casualty work requires careful valuation of unpaid claims and premium liabilities, along with formal reporting by the Appointed Actuary.

Pop Quiz

State the definition of materiality. (That definition has been asked on several past exams.) Click for Answer 

Study Tips

This reading is foundational and covers standards of practice that all actuaries are expected to follow. We will refer to these as CSOPs. Note however, that this material is already largely covered in other syllabus readings.

The current syllabus lists this reading as new, but it is really just an update. The changes for 2022-Fall version of the CSOPs were due to the switch to IFRS 17.

It is important to note that the Consolidated Standards of Practice are not laws, but rather recommendations and best practices for actuaries. Nevertheless, they are widely recognized and followed by actuaries in many countries, and they provide a basis for the development of actuarial standards and regulations in various jurisdictions.

Estimated study time: ½ day (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• enquiring and responding professional: definitions & communications
• general considerations in estimating liabilites

 Outdated   → questions highlighted in orange are outdated because they are from material no longer on the syllabus

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #20)	SCENARIO: - identify/correct AA errors
E (2017.Spring #25)	MfAD(claims): - reasons to be > 20%	see CIA.MfAD	see CIA.MfAD
E (2016.Fall #26)	definitions: - claims & premium liability	estimating liabilities: - considerations	see CIA.Discnt	see CIA.Disclosure
E (2015.Fall #25)	see CIA.MfAD	MfAD(claims): - reasons to be > 20%	MfAD(inv): - reasons to be < 2.5%
E (2014.Fall #31)	definitions: - enquiring/responding prof.	communications: - enquiring professional	communications: - responding professional

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In Plain English!

CSOP 1240: Materiality

Recall that CSOP is an abbreviation for Consolidated Standards of Practice. Everything you need to know about CSOP 1240 is in CIA.Mat.

CSOP 1400: The Work

CSOP 1400 covers, among other topics, subsequent events and modeling. These are already covered in depth in CIA.Subseq and CIA.Models. The rest of this CSOP covers topics that are obvious and/or familiar. There was 1 item, however, right at the beginning that struck me as interesting.

Question: briefly describe when an actuarial approximation is appropriate

An approximation is appropriate if it does any of the following without affecting the result

• reduces cost
• reduces time
• improves control

But what exactly does this mean? A different way of explaining it is to say:

• approximation permits the actuary to strike a balance between the benefit of precision and the effort of arriving at it

→ An example of an appropriate approximation is if you spend 5 seconds to reduce the expected error of your reserve estimate from 20% to 1%.

→ An example of an approximation that isn't appropriate is if you spend 10 years and a billion dollars to get an extra 0.0001% of accuracy. Duh.

True Story: Several years ago I was in a meeting where we were discussing Ben Zehnwirth's reserving software. The annual license was exceedingly expensive, and I said out loud, "Why do we care about a more accurate reserve estimate?". Everyone gave me strange looks so I dropped it, but what I had in mind was this idea of appropriate approximation. Zehnwirth had not provided us with what I thought was convincing evidence that his software would indeed work better (that's a whole other story) and the annual licence was something like $200,000 a year, plus all the time it takes to learn and customize the software. There was clearly a huge cost. There should be a correspondingly huge benefit. Otherwise the resulting reserve approximations are not appropriate.

Subsection 1460: Quality Assurance

This section is only 2 pages and Ian-the-Intern helped me scan it for questions. Here's what we found:

Question: identify examples of quality assurance processes

• check calculations
• validate models (this is discussed in great detail in CIA.Models)
• redo the work (gosh, that seems like a lot of trouble!)
• peer review (see OSFI.AA - peer review)

Question: identify considerations in determining what quality assurance processes to perform

• purpose of work
• complexity of work
• significance of work

and also...

• vulnerability to error
• expectations of user
• legislative requirements (for peer review)

The answers to the questions above are things you could probably come up with even if you hadn't memorized them. They are pretty much common sense. I wouldn't stress too much over this section, but I wanted to include it since it's new and could be easy points on the exam.

Oh, and Alice just reminded me of an extremely obvious addition to Section 1490 - Documentation that's related to this new section on Quality Assurance. The documentation CSOP now states that the quality assurance process should be documented. Duh.

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CSOP 1510: Actuary's Use of Another Person's Work

This CSOP section has an "exam-ready" bullet point list. If I were studying, that's all I would learn from this section.

Question: identify items an actuary should consider before using using another person's work

• qualifications of the other person
• regular communication & info-sharing with the other person
• awareness by the other person of how the work is being used

I don't think this list is too hard to remember. The 3 items are common sense. (The source text listed 5 items, but these 3 seem to capture the intent well enough.) Anyway, I always like to spend extra minute or two thinking of examples. That always helps my memory. Bonus points for humour.

Examples:

• qualifications:

   - the other person is an ACAS or FCAS → good! :-)

   - the other person is a lazy summer intern named 'Luke' who is the boss's nephew → not so good :-(

• communication & info-sharing:

   - the other person has a 10-15 chat minute with you every morning → great! :-)

   - the other person blocked your cell → uh-oh :-(

• awareness:

   - the other person asked you details about how you're using their work → awesome! :-D

   - the other person's favourite T-shirt says: I am the centre of the universe and you don't matter to me at all. :-o

CSOP 1520: Auditor's Use of an Actuary's Work

This section discusses the relationship between auditors and actuaries. Here are a few important acronyms:

CIA: Canadian Institute of Actuaries

CICA: Canadian Institute of Chartered Accountants

JPS: Joint Policy Statement

The collection of facts you need to know is in the quiz. (I didn't feel there was a good reason to duplicate all that information in the wiki.) Don't skip it because some of this was asked on prior exams.

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CSOP 1600: Assumptions & Methods

This CSOP makes me and Alice laugh sometimes. The first bullet point says:

1610.01: The actuary should select a method that takes account of the circumstances affecting the work.

Um, really? I would never have thought of that. 😀

They go on to say:

1620.01: The actuary should identify and select each assumption that is needed for the work.

Duh. Actually there's a small exception to these that might be worth mentioning:

• sometimes methods or assumptions are mandated by law or stipulated by the terms of the engagement

The section on CSOP is about 8 pages long and nothing really jumped out as a likely exam question. Some of the topics addressed are:

• ranges for assumptions
• historical experience versus future predictions
• assumptions that are independently reasonable and/or reasonable in the aggregate
• anti-selection (which seems to be the life insurance term for adverse selection)

Note also that many of the examples provided in the text are from life insurance. All in all, I don't think CSOP 1600 is worth spending much time on. If there's a question on the exam, chances are you can answer it with common sense and general knowledge.

CSOP 1700: Reporting

CSOP 1700 is mainly common sense information. The most important concept in reporting is the intended use & user. This same concept came up in Odo.FinReg in the subsection SAP vs GAAP. For BattleQuiz #1 in that wiki article, you were asked to identify the objective and users for financial statements prepared under SAP versus those under GAAP. The same idea applies to reporting in general, and there are different categories of reports (see below) for different uses & users.

Another reading where reporting considerations are discussed is CIA.Mat in the subsection disclosure and reporting for materiality. Take 2 minutes to review it. It's always good to relate new information to things you already know.

So getting back to CSOP 1700, I found a few good exam-style questions.

Question: identify & briefly describe 4 types of actuarial reports according to CSOP 1700

• external report

   - formal & detailed

   - range of appropriate reports is narrow (narrower than for internal reports)

• internal report

   - may be formal & detailed OR informal & abbreviated depending on use & user

   - range of appropriate reports is wide (wider than for external reports)

• oral report

   - useful to an internal user

   - disadvantage (versus internal report) is no written record

• summary report

   - a simplified way to communicate actuary's analysis

   - may be part of an external or internal report

Question: identify items included in an external report according to CSOP 1700

• name of client
• description of work, use, user
• state that it may not be appropriate for other uses
• state whether accepted actuarial practice was used (I hope so!)
• assumptions (and justification)
• methods (descriptions of)
• reservations (if any)

(and many others, most of which are common sense)

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CSOP 2100: Insurance Contract Valuation - All Insurance

The material below has been removed from the syllabus. The only portion of CSOP 2100 still on the syllabus is "2100: Scope" and there doesn't appear to be any testable information in that very short 1-page section.

You can skip the rest of the this section on CSOP 2100.

CSOP 2100 is a more general version of CSOP 2200. It's roughly 20 pages of bullet point lists, some of which are common sense while some are very obscure. I pulled out 2 paragraphs that are worth reading, but I couldn't find anything that would make a good exam question.

Question: briefly describe the actuary's responsibility regarding valuation according the CSOP 2100

2120.01: The actuary should value the insurance contract liabilities and the reinsurance recoverables for the statement of financial position and the changes in them for the statement of income. [Effective April 15, 2017]

A key point is that you have to explicitly mention reinsurance recoverables as well as changes in liabilities because that affects income. I think this is a low-probability question.

The next item often appears in some form on the U.S. version of Exam 6, but the appointed actuary's report is given much more weight in the U.S. exam. The 6C exam committee emphasizes different topics so I think this is a low-probability question as well.

Question: what is the standard reporting language for the AA's report according to CSOP 2100

2130.16:

To the policyholders [and shareholders] of [the ABC Insurance Company]

I have valued the policy liabilities [and reinsurance recoverables] of [the Company] for its [consolidated] [statement of financial position] at [31 December XXXX] and their changes in the [consolidated] [statement of income] for the year then ended in accordance with accepted actuarial practice in Canada including selection of appropriate assumptions and methods.

In my opinion, the amount of policy liabilities [net of reinsurance recoverables], makes appropriate provision for all policy obligations and the [consolidated] financial statements fairly present the results of the valuation.

[Montréal, Québec] [Mary F. Roe]

[Report date] Fellow, Canadian Institute of Actuaries

The language in square brackets is variable.

Actually, what they sometimes do on the U.S. exam is provide a version of that statement but with errors inserted. They then ask you to identify and correct the errors. Unfortunately, to do that means essentially memorizing the statement verbatim. One easy thing to note is that the FCIA designation is not optional, in Quebec, so if that's missing, that would be an error.

Pop Quiz!    :-o

• Which 2 provinces allow an exception to the rule that an 'actuary' must be a FCIA?

(The answer is in KPMG.PACICC in the subsection definition of an actuary.)

CSOP 2200: Insurance Contract Valuation - Canadian Considerations

This is covered in other readings, primarily the IFRS 17 readings.

CSOP 2300: Insurance Contract Valuation - International Actuarial Standards of Practice

This is covered in other readings, primarily the IFRS 17 readings. CSOP 2300 is a good document to keep handy if you're working on the appointed actuary's report, but I didn't find any good exam questions here. It's about a dozen pages of bullet point lists with things you need to consider when advising an entity about the calculation of liabilities. For example, if the entity has multiple reinsurance contracts, the actuary should consider the order in which the various reinsurance contracts apply because a different ordering could lead to a different estimate for recoverables. You might want to glance at the source text just to see what's there, but unless you want to memorize all of these bullet point lists, I really don't see any good potential exam questions.

Here's a quick summary:

• Section 2300 provides guidance for actuaries on the valuation of insurance contracts. The standard sets out the principles and practices that actuaries should follow when estimating the value of insurance liabilities.

• The standard covers various aspects of insurance contract valuation, including the calculation of future cash flows (using GMA or PAA), the determination of appropriate discount rates, and the recognition of various financial and demographic assumptions, such as interest rates and policyholder behavior. The objective of the standard is to ensure that actuaries produce insurance contract valuations that are reliable, consistent, and transparent, and that they comply with professional and ethical standards.

CSOP 2400: The Appointed Actuary

This is covered in other readings, primarily OSFI.AA.

CSOP 2500: Financial Condition Testing

This is covered in other readings, primarily CIA.FCT-1.

CSOP 2600: Ratemaking: Property and Casualty Insurance

This material is covered in CAS Exam 5 on Basic Ratemaking and Estimating Claim Liabilities. This shouldn't be specifically tested unless it's something very general which you would know from experience and common sense anyway.

This quiz covers the last several CSOP sections above but most of it is now outdated.

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POP QUIZ ANSWERS

Definition of materiality: An omission / under-statement / over-statement is material...

...if the actuary expects it to materially affect the user's decision-making or reasonable expectations.